10 reasons to open a savings account if you haven’t already
Saving is a productive habit, and one that most children learn with their first piggy bank. In today’s economy, however, some people might ask, “Should I open a savings account?” especially when interest rates are so low.
A GOBankingRates survey has revealed alarming results regarding Americans’ saving habits. Although just over 50% of respondents had a balance in a savings account, 62% had less than $1,000 in a savings account, and only 29% had more than $1,000 set aside for emergencies.
Nearly 30% of respondents said they have $0 in a savings account. Among those who had a savings account, only 14.2% had a balance of $10,000 or more. Here are a few reasons why you should open a savings account, or at least keep that piggy bank.
Related: Learn the right way to fund a savings account
1. Life happens
Life has its ups and downs, and some downs are expensive. Having savings you can rely on when you need them provides a sense of security and can mean the difference between going through a crisis or going bankrupt.
“Having only your salary to live on is terrifying,” said Heather Garriock, a mortgage agent at The mortgage group. “Anything can happen! Car accident, leaky roof, your child is injured while playing sports.
“It’s crucial to have savings for these emergency times so it doesn’t set you back,” she said. “Even a simple interest-bearing savings account from your bank is better than nothing. The rewards will not be large, but you will have access to this small amount of money when you need it.
Garriock also recommended opening a tax-free savings account (TFSA), or a Roth IRA, which is the equivalent of the Canadian TFSA. “It’s free and often harder to access on a day-to-day basis, so it becomes harder to dive into it,” Garriock said. “It also encourages people to open another more accessible savings account. Now you have two savings accounts, one immediate and one long term. »
2. Take control of your finances
Maintaining a savings account takes discipline and can help you better understand your financial situation. People who manage their finances proactively tend to be in better financial health and more likely to live within their means.
“People who have savings, from a customer’s perspective, generally tend to be better at managing their living situation and their finances,” Garriock said. “Most of them also have a plan to pay off their mortgage.”
3. It’s cheaper than borrowing
The alternative to tapping into savings when you need money is to borrow. But it can be expensive. According to Mark Kantrowitz, a specialist in student aid“If you were to save $200 a month for 10 years at an interest rate of 6.8%, you would accumulate a total of $34,433.”
“If, instead of saving that amount, you were to borrow it and pay it back monthly over 10 years at 6.8% interest, you would pay $396 per month, which is almost double,” he said. declared.
It’s important to note that while the example above is meant to help compare savings and borrowing costs, Kantrowitz said an interest rate of 6.8% might be possible with a long-term approach to savings.
“Using an age-based asset allocation that starts at 100% equity and reaches 20% equity, with an average annual return of 12% on an all-equity fund and an average annual return of 2 % on an investment with little or no risk of loss on principal, the 17-year average annual return will be around 6.8%,” he said.
4. Weather economic downturns
Having a savings account can help you weather either a downturn experienced by your employer or a larger economic downturn. You might be laid off and need a cushion until you have a stable income again.
According to Kantrowitz, “the average length of unemployment, even during the last economic downturn, was five months. So, by saving six months’ salary in a savings account, you have enough money to deal with short-term unemployment or other emergencies.
5. Pay for college education
The average 2015 graduate has $35,000 in student loan debt, according to an analysis by Kantrowitz cited in The Wall Street Journal. More concerning is that many parents are still paying off their own student loans when their children go off to college, according to an analysis by The Associated Press.
FinAid.org reported that the cost of tuition could be more than three times the current cost by the time today’s newborns go to college. With that in mind, Kantrowitz recommended a college savings plan for parents.
“Not only is it a tax-efficient way to save for college, but it also gives you the flexibility to choose a more expensive college that might be a better fit for your studies,” he said.
6. Avoid getting into debt
Without accumulated savings, an unexpected expense such as a home repair, medical emergency, or disability may require you to go into debt to meet the expense.
Mike Chadwick, Investment Advisor at Chadwick Financial Advisorswarned that if you don’t have any savings, “you’re going to end up in debt with credit cards, loans from family or some other source, and it’s a slippery descent if you’re not disciplined to always save from your income.
“Having no savings and slowly getting into debt is how most financial problems start,” he said. “It’s a bit like a person who ‘just tries’ drugs; this often leads to a much bigger problem in the longer term,” he added.
Related: What is the average savings account interest rate?
7. Gain financial flexibility and options
Savings can bring a bit of luxury into your life, not just provide funds for tough financial times. “Savings accounts are an essential part of any solid financial plan,” said Daniel Zajac, a certified financial planner with Simone Zajac Wealth Management Group. “A good savings account can give you options in times of need and in times of need.”
A separate savings account can allow you to purchase otherwise unobtainable items if you tend to spend up to your available checking account balance. “Savings accounts can also be used as a mechanism to save for short-term goals: a vacation, a down payment on a new home, or college fees that are coming due,” he said.
8. Maintain your capital and its value
Savings account interest rates are currently low but, according to Zajac, “With savings accounts, the goal is usually not to get a good rate of return. The objective must be the preservation of capital. In other words, don’t lose any value.
To deal with an uncertain stock market, balance is key to surviving periodic crashes, according to personal finance blog A Wealth of Common Sense. A stable savings account or creating a conservative portfolio can help your capital retain its value during a bear market. A large portfolio that contains a mix of stocks, bonds, and other investments can be a safer way to save without risk.
Why Your Savings Should Earn Compound Interest
9. Out of Sight, Out of Mind
It’s easier to avoid spending all of your income if your savings are set aside before you have a chance to spend. Andrea Woroch, a nationally recognized personality consumer credit specialistrecommends separating your savings account so that it is not linked to your checking account.
According to Woroch, with a separate savings account, “you can’t easily transfer funds online or withdraw at an ATM. Keeping your savings separate ensures that you will have less access to them and will help you learn to live with what you have in your checking account. After all, what’s out of sight is out of mind, so you won’t be tempted to tap when your checking balance is low.
Read: Ditch Sub-Par Savings Accounts: 7 Ways to Save Money Faster
10. Achieve short and long term goals
Savings must have a purpose. A savings account can be an emergency fund, but you can also maintain a fund for a new car, house, or other desired goal. The psychological and motivational benefits of achieving a goal can improve your life management abilities and prospects.
According to Woroch, savings accounts help you “realize your progress and efforts and ultimately gauge your ability to meet those various needs or wants.” One of the benefits of saving is getting money back on what you save. “Opening an online savings account with an FDIC-insured online bank ensures that you get something back from the money you put aside,” Woroch said.
To Find That Elusive High-Interest Savings Account, Debt Expert and Financial Lawyer Leslie Tayne also suggested that you “look for online savings accounts, which generally offer better interest rates than physical locations.”
Set up a savings account separate from your day-to-day sources of cash. You can experience better financial health, greater control over your life, a sense of accomplishment, and most importantly, a reduced risk of financial hardship.